Analysis: Draghi may bring new tone as central bank head

Published June 23, 2011

Reuters

June 23, 2011 – By Paul Carrel

Draghi has so far shown no clear sign of taking different positions than Trichet on key policies. But his public communications style may, initially at least, be less assured and less readily understood.

Trichet is still leading the ECB's handling of the Greek crisis, official sources in the euro zone say, but as the time for Draghi to take over approaches, governments in the region are increasingly keen to consult the Italian.

German Chancellor Angela Merkel, who is trying to put together a new rescue plan for Greece and desperately needs the cooperation of the ECB, has started working closely with Draghi and met him last week to discuss Greece.

When pressed -- gently -- by lawmakers in the European Parliament this month about his past at investment bank Goldman Sachs, Draghi was briefly rattled. Trichet would simply have stuck to a well-rehearsed script and said nothing more.

"I mean, if you already know it is not the truth, then why should you ask the question?" Draghi snapped at one lawmaker when asked about Goldman, before recovering his poise.

Denying involvement in swap deals which Goldman did with Greece a decade ago, and which subsequently became controversial as Greece's fiscal picture darkened, Draghi added: "I have said this on and on and on."

TRICHET

Trichet reformed the ECB's communications style during his eight years there, gaining a reputation for clarity and consistency at the bank's monthly news conferences. He developed a series of commonly understood phrases to telegraph the ECB's intentions on monetary policy.

By contrast, Draghi has been one of the less prolific speakers on the ECB's 23-member Governing Council. He has given little away on his monetary policy views in the past.

"Knowing he is not as polished a communicator as Trichet, I think initially he will get around the pitfalls by not saying much," said Berenberg Bank economist Holger Schmieding.

"(Wim) Duisenberg said a lot, Trichet said a little, I expect Draghi to say even less," Schmieding added, referring to the ECB's first two presidents.

Andrew Bosomworth, a senior portfolio manager at giant bond investor Pimco who himself used to work at the ECB, expects Draghi to come under growing public scrutiny in the coming months, although Trichet will remain the main focus for markets.

One challenge for Draghi may be mastering the art of answering a question satisfactorily without saying anything new that might be misinterpreted by markets -- a skill at which Trichet excels.

"The moments when Trichet gets asked a question and he has to give a complete non-answer -- that's going to be a testing point for him," said Bosomworth.

POLICY

Some investors speculate that Draghi may be less hawkish than Trichet on monetary policy. They note that in his European Parliament testimony, he did not repeat, as some other ECB policymakers have done, Trichet's recent comment that the bank was exercising "strong vigilance" against inflation.

"As regards monetary policy, to fine tune-the exit from the still very accommodative monetary policy stance and the phasing-out of the remaining non-standard measures is certainly a great challenge," he said.

However, the relatively dovish impression that he left may merely have been due to the difference between his communications style and Trichet's reliance on familiar phrases.

In other public appearances this year, Draghi has sounded quite hawkish, stressing the need to return loose policy to normal -- perhaps because he has wanted to impress Germany, where some public opinion has worried about the prospect of an ECB chief from a country with a history of fiscal indiscipline.

Some analysts speculate that to avoid being identified as a dove, Draghi will have to go out of his way to sound especially hawkish in his first news conferences after he takes office.

In any case, monetary policy is set by the ECB's whole Governing Council and the debate is believed to be influenced by heavyweights such as hawkish Executive Board members Juergen Stark and Lorenzo Bini Smaghi, and former vice-president Christian Noyer. So a change of approach appears unlikely.

A more intriguing possibility is that Draghi could soften the ECB's firm opposition to restructuring Greece's sovereign debt. European governments are trying to arrange for private investors to agree to a rollover of Greek debt, but this has been made difficult by the ECB's insistence that any rollover not be classified by credit rating agencies as a default.

However, Draghi toed the current ECB line in his parliamentary testimony, saying the cost of any Greek default would probably outweigh the benefits, and that a default could cause a chain reaction across financial markets.

Silvio Peruzzo, analyst at RBS, said of the ECB's stance on debt restructuring under Draghi, "I think we are guaranteed some continuity on this."

Any softening of its position "would depend on whether there was a reconsideration within the ECB itself, but one of the most striking elements of the debate on how to solve this situation is that the ECB has converged internally on a position, and there are absolutely no signs of backtracking at the moment."